Everyone in India is liable to pay taxes to the government, no matter which state they reside in. The government must collect taxes from eligible citizens to run the country judiciously.
Every tax imposed within the boundaries of India must be supported by a corresponding statute approved by the State Legislature or the Parliament. In this article, you’ll learn not only what is tax but also about its types, how it works, and more. So, let’s start.
What is Tax?
A tax is a mandatory fee charged by a government on an individual or an organization to collect revenue for the benefit of the population. This collected revenue is used to finance projects for the public welfare and public interest.
Projects that benefit the general population, the public interest, and social welfare, such as schools, bridges, infrastructure, and hospitals, can be financed by taxes. Many initiatives by the government that don't have significant economic benefits are also supported by taxes paid by the citizens. All persons and legal entities in India are subject to taxation.
Legal tax entities such as corporations, development organizations, associations of people, and non-profit organisations are liable to pay both indirect and direct taxes. A taxpayer may also be required to pay customs fees when bringing products into India. So, now that you have a brief understanding of the tax meaning, let’s learn more about its types.
Types of Tax
Everyone is liable to pay their respective taxes in different ways, from organizations and corporations to individuals. These taxes are further divided into direct and indirect taxes based on how they are paid to the taxing authorities. Let's examine both tax categories in more detail:
Direct Tax
The term "direct tax" is disguised in its name, which suggests that the taxpayer pays this tax directly to the government.
The two most prevalent types of this tax in India are the wealth and income tax.
Since it is directly related to the income or wealth of the registered taxpayers, estimating tax revenues from direct taxes is very simple from the government's point of view.
Indirect Tax
The collection process is slightly different for indirect taxes compared to direct taxes. Consumption-based taxes like these are levied on purchasing and selling goods and services.
The supplier of the goods or services pays the government an indirect tax.
The vendor then transfers the tax to the end-user or purchaser of the commodity or service.
The ultimate user of the commodity or service does not make any direct tax payment to the government. That’s why it's called ‘indirect’ taxes.
Examples of indirect tax include Goods and Services Tax (GST) and Sales Tax.
How Does Taxation Work?
Your income bracket for the given financial year determines how much tax you’re liable to pay. The tax slab for an individual is different than that for a corporation. Nevertheless, different income sources are taxed at different rates or under numerous restrictions.
The following forms of income, referred to as "heads of income" by Indian tax rules, are recognized by the Indian tax system:
Income from House Property
Income from Capital Gains
Income from Salary
Income from Other Sources
Any regular source of income is covered under salary income. The rental revenue from a residential home is referred to as house property. Gifts, lottery winnings, dividend income, and interest income are all included under "income from other sources."
Claiming exemptions and deductions have always been taxpayers’ preferred way to reduce their taxable income. There are some income and perks that are tax-exempt. You can get a tax exemption if you have these incomes.
You are entitled to these deductions when you invest in tax-saving instruments or pay for certain expenses. For instance, school tuition costs to some extent as defined in Income Tax Act, 1962 are allowable as a deduction from gross income.
Recent Reforms in Taxes
One of India's most recent, innovative, and groundbreaking tax reforms launched by the Government in 2017 is the GST or the Goods and Service Tax.
Governments have always imposed various state and federal taxes on people who use different services or purchase different commodities. The prior improvements had the drawback that the taxing system was convoluted and that some persons could escape taxes by exploiting the system's flaws.
Upon the successful implementation of the GST, a significant proportion of assessees came under the purview of taxation. This impacted tax evaders as tax evasion became more difficult to do so ever since.
What is Income Tax?
Income tax is a tax levied on the annual income of an individual or organization earned in a given financial year. Every year, a portion of your income is paid to the government, which utilizes it to finance national development and growth initiatives.
Income Tax Assessee
An income tax assessee is any person who must file taxes and is in the income tax bracket that is payable. If a person's included annual income falls below the threshold amount periodically set by the government or income from exempt sources like agriculture, they are exempt from paying tax.
Income Tax Slabs
Not every individual pays the same tax amount in India. As mentioned earlier, the more your income, the more taxes you’re liable to pay. The government utilizes income tax slabs to establish the rate at which each individual tax assesses is obligated to pay income tax to ensure that tax rates and laws are fair rather than uniform.
Income Tax Deductions
If your taxable income exceeds INR 2.5 lakh, you’ll fall under the applicable tax bracket and be liable to pay income tax. With tax-saving solutions like EPF (Employee Provident Fund), PPF (Public Provident Fund), mutual funds, ELSS (Equity Linked Saving Scheme), and tax-saving fixed deposits, you can save a lot on the income tax you’re liable to pay.
Please note that these tax deductions can only be availed in old tax regime. These deductions are not available in new tax regime.
Tax Deducted at Source
Tax Deducted at Source, or TDS, is one of the most popular methods by which the government withholds tax from salaried individuals. Another instance of the inclusion of TDS is the provision of interest on fixed deposits. In this instance, the tax assessee may be eligible for a refund following the filing of an ITR.
Also Read – What is ITR?
Tax Evasion
The Indian government has created several tax laws that all citizens must follow; otherwise, harsh measures may be taken against them. Penalties for non-compliance with certain tax laws and their related parts include Section 140A (1), Section 271 (C), Section 142 (1), and 143 (2) under the Income Tax Act, 1961.
Every eligible Indian citizen must pay taxes, contributing to the country’s growth and development by financing adequate services and amenities.
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